By: Matt Badiali — September 9, 2020
These Best-Performing Gold Stocks May Not Remain Top Dogs For Long
Lately, precious metals have become the hottest sector in the market.
Current economic conditions set precious metals like gold and silver up for long bull markets because their prices rise with inflation.
But gold miners did even better.
That’s why, in order to position ourselves for the biggest profits, we want to target the mining companies.
Looking at the 10 best-performing gold stocks in the chart below, we can see the average stock rose 143% over the past year.
In addition to their returns, we can see their size (by market cap), how much they sold their gold for, and how much cash they made:
We can pull some interesting information from this data.
First is that a non-gold-producer, International Tower Hill, is fifth on the list. The company’s website claims it’s the “largest independent gold-only resource in North America”.
The company owns the Livengood project in Livengood, Alaska. It’s a giant, low-grade gold project that holds about 9 million ounces of gold reserves. (We call the mineable part of the ore body the “reserve ounces”.)
Tower Hill began work on this project in the last bull market. As the gold price fell after 2011, the company continued work.
In 2013, Tower Hill published a study that showed the project had a net present value of -$829 million. But the Livengood project needs between $1.5 billion and $2.2 billion to become a mine.
That’s… not good.
Even though this project has a chance to bounce back in today’s climate, I’m still not a fan. I’d rather own a producer that can take advantage of gold’s rising price.
Looking back at the chart, the fourth column shows us the “Realized Gold Price”.
The average price in that column is $1,671 per ounce. The average gold price in the third quarter of 2020 so far is $1,909 per ounce. That means miners should see a 14% bump in gold sales just from the price appreciation.
But that isn’t being priced in.
As you can see in a chart of the Philadelphia Gold Bugs Index (HUI), the price is down 7% from its August high:
That tells us there’s a big opportunity to get into gold miners today.
For one, gold’s price will give miners a 14% boost. Secondly, the index shows us that the group is 7% off its recent high.
In my experience, the best performers aren’t necessarily always the best going forward. So, I prefer to use a simple price- to free-cash-flow measure to gauge what to buy. That tells us a company’s profitability compared to its size.
Today, the industry average for Price to Free Cash Flow is 31 times. The table below shows the top 10 performers over the past year, ranked by Price to Free Cash Flow:
Only three of the top 10 companies come in under that 31-time average: DRD Gold at 20 times, B2 Gold at 16 times, and Caledonia Mining at 4.4 times.
Any of these gold miners are worth consideration going forward. I’d even add two more companies to that list: China Gold International at 5.8 times and Alacer Gold at 7.6 times.
Considering this sector is poised to head higher over the next year or two, putting some money to work here is a great idea.
If you’re looking to speculate on gold miners, these five companies are a good place to start. As always, though, do your own homework before you invest in any company.